Investors love dividends. This one investing component has comprised a major portion of total returns through time. The trend in recent years has been for companies to pay dividends and keep raising it. At the same time, many companies that have been around for sometime may have grown past their major growth phase. Some of these companies have started paying dividends, while others have chosen not to.
24/7 Wall St. praises dividends. We also want to call out the myriad of great companies that need to realize that times demand investor payouts. A few companies are still buying growth, and we have identified some of these players as well. The thesis behind offering a solid dividend is that it instills confidence in investors that the company has earnings visibility for years even when the business cycle slows.
Having a real dividend policy may also be the key to keeping nervous investors from fleeing and going into cash or Treasury bonds, which pay almost nothing these days. There are just still too many companies in denial that they are still growth companies when they need to start directly rewarding shareholders. Some companies can get away without paying out a single cent to owners because the value of growth is so strong. That list is shrinking these days. Most companies we identified are in what we would call the “Dividend Sinners” category.
Our review focuses on Amazon.com Inc. (NASDAQ: AMZN), Bed Bath & Beyond Inc. (NASDAQ: BBBY), Berkshire Hathaway Inc. (NYSE: BRK-A), Dollar General Corp. (NYSE: DG), Dollar Tree Inc. (NASDAQ: DLTR), eBay Inc. (NASDAQ: EBAY), Electronic Arts Inc. (NASDAQ: EA), EMC Corp. (NYSE: EMC), Express Scripts Inc. (NASDAQ: ESRX), Jack in the Box Inc. (NASDAQ: JACK), Teradyne Inc. (NYSE: TER), United Continental Holdings Inc. (NYSE: UAL), Yahoo! Inc. (NASDAQ: YHOO) and Zebra Technologies Corp. (NASDAQ: ZBRA). We have handicapped whether investors might expect a dividend in the near-term or long-term from each of these as well.
The first order of business is to identify some of the great companies that have started paying a dividend since we (and others) have called for them to act with dividend payments in the past year or two. A few would include Apple Inc. (NASDAQ: AAPL), Dell Inc. (NASDAQ: DELL), Cisco Systems Inc. (NASDAQ: CSCO), Amgen Inc. (NASDAQ: AMGN), Symantec Corp. (NASDAQ: SYMC) and NASDAQ OMX Group Inc. (NASDAQ: NDAQ).
Amazon.com Inc. (NASDAQ: AMZN) is the de facto the king of online retail for just about anything now. Its market cap has grown to almost $125 billion, and that makes it one of the largest of the dividend sinners out there. To date Jeff Bezos has invested in growth and a broader reach, even at the cost in some quarters of almost no margin. We would not expect the company to take on debt to pay a dividend, and it trades at an expected 180 times earnings this year and more than 75 times earnings for 2014. As shareholders have been loyal, it is hard to criticize Amazon despite its dividend sinner category. That being said, Amazon should start to see a peak in growth, and its days of no dividends may need to come in line with the market after another two or three years.
Bed Bath & Beyond Inc. (NASDAQ: BBBY) has been public since the early 1990s and had been a massive retail growth story. That organic growth has started to peter out, and its shares have run into a long-term peaking stage after about 20 years of growth. The home products retailer is worth close to $15 billion, and it has about $1 billion in liquidity and no long-term debt. The retailer has chosen to make acquisitions and spend its capital buying back stock rather than paying out a dividend. Most of its peers pay a dividend. With sales growth now in the single-digits and with shares trading at about 13 times earnings, Bed Bath & Beyond could easily fund a 2% dividend yield and still have ample liquidity to fund its large share buyback plan and make strategic bolt-on acquisitions if they come up. There just seems to be no major growth story now that there is not a rival like Linens n Things to go bankrupt again.
Berkshire Hathaway Inc. (NYSE: BRK-A) never gets called out for not paying a dividend. The problem is that this conglomerate has always had Warren Buffett’s ability to sooth investors as a feather in its cap. What happens when Buffett finally steps down? The new management team will not be given the luxury of saying that America’s best days are still ahead of it and the new management team will not have Buffett’s track record of getting to participate in the greatest growth of wealth in history. Buffett has always loved to invest in companies that pay dividends, and his only start of a return of capital has been on share buybacks here and there. Berkshire Hathaway is worth some $265 billion, yet it never has returned a single cent in the mail to shareholders outside of capital gains. Buffett has hinted that Berkshire could ultimately pay a dividend, but we will not hold our breath here until a new CEO is formally named. Of the companies that could easily be considered Dow Jones Industrial Average companies, Berkshire Hathaway is a key dividend sinner, whether it has Warren Buffett and a great track record of shareholder gains or not.
Dollar Stores Unite! Dollar General Corp. (NYSE: DG) and Dollar Tree Inc. (NASDAQ: DLTR) are both still dividend sinners, even as Wal-Mart Stores Inc. (NYSE: WMT) now has a respectable 2.4% dividend yield. The dollar store theme is still a secular one by our count, but we are not sure how many years these retail upcomers can keep growing their store counts indefinitely. Dollar General now has almost all of its private equity backers out of the company, and Dollar Tree has had many stock splits. Now that these shares have experienced some reality in the endless growth, it seems that a dividend policy by one or each would be warranted in the next year or so. We honestly believe that institutional shareholders will start to call for dividends here at some point, as well.
eBay Inc. (NASDAQ: EBAY) shares are back close to multiyear highs, and its growth has been aided by acquisitions and fine tuning. It is very possible that eBay will choose to keep buying growth rather than institute a payback, and Moody’s even recently said that it doubts that eBay will jump on a dividend craze this year. Our take is that the core auction business growth has seen its heyday and the rest of growth will come from transactions, processing and other avenues. That being said, eBay is now worth almost $70 billion, with liquidity approaching $16 billion, versus only about $4 billion in long-term debt. eBay could easily begin a payout with a 2% yield and maintain ample capital for acquisitions.
Electronic Arts Inc. (NASDAQ: EA) has remained dead money in video games for years now. New management can change direction, likely with layoffs and a focus into newer gaming trends. This turnaround never turned around, and with shares close to $18 it is way under the peak of $50 and $60 from before the recession. With a new wave of consoles coming, there may finally be ample room for more games to drive interest away from the freemium tablet games that have taken over. EA is worth only about $5.4, but it has above-market P/E multiples due to its turnaround not generating earnings power yet. New management will have an opportunity to clean house and to send a message that earnings and liquidity can be maintained for years and years with a steady dividend policy. GameStop Corp. (NYSE: GME) yields over 3% yet, EA yields zero, despite EA having close to $2 billion in liquidity. The only thing missing for this growth-starved outfit is a dividend that would at least appease shareholders while it figures out how to recapture the title of being the largest video game outfit again.
EMC Corp. (NYSE: EMC) is still the king of storage and it owns the lion’s share of VMware Inc. (NYSE: VMW) for virtualization. The company is worth close to $50 billion, and it trades at only about 12 times expected earnings. EMC also carries well over $10 billion in liquidity, with a negligible long-term debt level if you discount its deferred long-term liability charges. EMC’s annual report has said over and over that it reviews its dividend policy but has chosen to grow with acquisitions. While EMC has been somewhat immune from outside shareholders, EMC is largely immune to outside pressure from holders, the stock has not really gone anywhere, and EMC could unlock massive value with that VMware stake and a big dividend if it chooses to. This remains one of our top dividend candidates, and we just cannot understand why after being public since the late 1980s that it still wants to be a dividend sinner.
Express Scripts Inc. (NASDAQ: ESRX) has now cleared its process of a giant merger with Medco Health Solutions, and it has been public for about 20 years. It has never paid a dividend despite splitting shares numerous times. This health care and cost containment via pharmacy benefit management provider is worth about $48 billion now and has close to $3 billion in liquidity. Unfortunately it also has close to $15 billion in debt from the buyout. That being said, it also trades at about 14 times earnings, and J.P. Morgan’s analyst team also has said that just about all of its peers pay dividends. Revenue growth here is lagging expected earnings growth, and the time for Express Scripts to get with the dividend game should come sooner rather than later. We would expect shareholders to start sending letters to management if the company is not paying a dividend in the next year or two.
Jack in the Box Inc. (NASDAQ: JACK) is one of the greatest technology and Internet growth stories that has ever existed. Well, maybe not. This is just another fast-food chain that competes with McDonald’s Corp. (NYSE: MCD) and others. The problem is that Jack in the Box does not pay a dividend. Even Wendy’s Co. (NASDAQ: WEN), despite its turnaround woes, pays a 3% dividend yield. McDonald’s pays a 3.1% dividend. Jack: zero! The company may have better commercials than its fast-food peers, but it has never managed to build up a massive balance sheet. That implies that it would have to do a payout from cash flow management and that may prove to be difficult. With no real revenue growth and a blended value of about 20 times forward earnings for this year and next, Jack in the Box needs to do something better in the shareholder reward department. It may seem too aggressive to make such a demand for a dividend when this stock is up about 60% in the past year. It just seems that new shareholders will want something tangible like a dividend for the enthusiasm to continue for what had been dead money up until a year ago. Its investor relations FAQ notes, “We do not anticipate paying dividends in the foreseeable future.” We would simply ask “Why?”
Teradyne Inc. (NYSE: TER) is now often forgotten or overlooked in the testing for semiconductors and for all sorts of electrical systems market, but it has been public since about 1970, and it has not paid out any dividends outside of share buybacks. Teradyne is worth just over $3 billion and trades at about 11 times expected earnings. The stock has been considered dead money, yet it has more than $1 billion in liquidity and less than $200 million in long-term debt. If Teradyne wants to go buy growth, then it needs to go do it. Otherwise it is going to take a real dividend policy to excite any new shareholders. One issue we have pondered here before is that much of its capital may be housed outside of the United States and would be taxed at high rates if repatriated. We do not have a full tally on that front, but we can easily see that Teradyne is lagging against peers, and it can still fund a dividend even from cash flow management.
United Continental Holdings Inc. (NYSE: UAL) is the airline king with $37 billion in revenues, yet the only airline with a token dividend is Southwest Airlines Co. (NYSE: LUV). The AMR bankruptcy and merger may offer UAL some cover, but shares have risen handily, and now this trades at about eight times expected earnings, versus about five times expected earnings last year. Dividend in the airline sector of course would have to be funded by cash flows rather than by being funded solely from the balance sheet. The sector is super-cyclical, and it would have to offer the caveat of “except during recessions or times of turmoil” in its dividend policy. Warren Buffett has always said, “Remind me to never buy an airline,” but maybe a stronger dividend policy may be required to entice new investors who missed the 50% gain seen since late in 2012.
Yahoo! Inc. (NASDAQ: YHOO) is again on the dividend sinners list and its investor relations site addresses the dividend by saying “No, Yahoo! has never declared a cash dividend.” The difference this time around is that Marissa Mayer is in charge and the stock has performed well. The board has been cleared out and the current policy has been to repurchase shares. We just assumed that the Alibaba sale proceeds would bring a one-time dividend to assist in this turnaround. With so many Internet peers not paying dividends, and with a turnaround story still playing out, we might not expect a serious dividend policy, even if it may help entice new shareholders who have missed this share run since Mayer took the CEO helm. Yahoo! spent $775 million buying back stock last quarter and still ended with $5.4 billion in cash and equivalents against a $28 billion market cap.
Zebra Technologies Corp. (NASDAQ: ZBRA) has just refused to listen and refused to look in the mirror that times have changed. This barcode, retail identification and RFID player grew massively from the early 1990s up to 2004, but it has never recovered its old highs. Zebra serves health care, manufacturing, retail, automotive and many other sectors. Why Zebra Tech was never acquired by private equity during the private equity boom was a mystery. Growth has run into a serious slowdown, and getting to $1 billion in sales has been difficult, even with a market cap of $2.35 billion and with about $400 million in liquidity, with no real long-term debt to speak of. Zebra Tech could easily adopt a 2% dividend yield without upsetting its growth ambitions nor altering cash flows in a way that would pressure its balance sheet. The FAQ in the investor site says, “Zebra currently does not issue dividends … We intend to retain earnings to finance future growth, including through acquisitions and internal development.” As we have said, Zebra’s stripes are showing an old-tech company that needs a new-world dividend.
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So, now you have a great list of Dividend Sinners for 2013. We certainly cannot expect that every single one of these companies will capitulate and start paying a dividend just because they should. Companies like Amazon, eBay and Yahoo! could wait years if they choose to. That being said, a good portion of these companies should declare dividend policies as the market keeps demanding a return of capital for shareholders.
Activist shareholders could become aggressive against these companies as well, and we have identified how activist investing may have reached a zenith, or a bubble. Regardless of the situation individually, many of these companies should understand that many fund managers, pension managers and other new investors just will not look at investing companies as legitimate investments until companies pay a dividend.
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